The U.K. Financial Services Authority has fined the London arm of investment bank Goldman Sachs £17.5 million ($27 million) for a breach of its rules. The penalty stems from a lack of communication between the firm’s U.S. operations and its London compliance department.

The regulator penalized Goldman Sachs International (GSI) because it failed to tell it that the U.S. Securities and Exchange Commission was investigating its involvement in a sub-prime mortgage product.

The U.S. firm knew about the investigation, but did not inform their compliance colleagues in London, who would have been obliged to tell the FSA. “No one [in the United States or the United Kingdom] considered the potential regulatory implications of the SEC investigation,” the FSA said.

The problems focus on a collateralized debt obligation (CDO) product, called Abacus, which Goldman Sachs marketed in the United States and the United Kingdom. In August 2008, the SEC started to investigate Abacus and one of the executives involved in structuring the product, Fabrice Tourre.

Tourre was later transferred to London, where he was formally authorized by the FSA as an “approved person” capable of holding positions of responsibility.

The London arm of Goldman Sachs should have told the FSA that Abacus was being investigated, because the product was marketed in London. Also, it should have been informed that Tourre was involved, because he had become an approved person.

“In particular, GSI did not have effective procedures in place to ensure that its compliance department was made aware of the SEC investigation so that it could consider whether any notifications needed to be made to the FSA in compliance with GSI’s regulatory reporting obligations,” the FSA said.

Even when the SEC issued formal Wells Notices—warning of enforcement action—to the U.S. arm of Goldman Sachs and to Tourre in September 2009, setting out allegations of serious violations of U.S. securities law, the FSA was still left in the dark. The regulator said that was despite the fact that several senior managers were aware of the Wells Notice.

The London compliance department only became aware of the SEC investigation in April 2010, when the SEC announced that it had commenced enforcement proceedings in the U.S. courts against Goldman Sachs and Tourre.

In July. the SEC announced a $550 million settlement with Goldman Sachs in connection with Abacus. Tourre meanwhile denies the allegations against him.

Margaret Cole, the FSA’s managing director of enforcement and financial crime, said: "We have repeatedly stressed the importance of firms self-reporting regulatory issues to the FSA in a timely way. GSI did not set out to hide anything, but its defective systems and controls meant that the level and quality of its communications with the FSA fell far below what we expect of an authorized firm.”

“The fact that senior business people at GSI in London knew about Mr Tourre’s Wells Notice, but did not consider the obvious regulatory implications for GSI is very disappointing. Had GSI complied with its U.K. obligations, the outcome for it would have been very different.”

GSI cooperated with the FSA and agreed to settle at an early stage, so it earned a 30 percent discount. Its fine would have been £25 million ($39 million).